OVERDRAFT PROTECTION: FAIR

PRACTICES FOR CONSUMERS

HEARING
BEFORE THE

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT
OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES
ONE HUNDRED TENTH CONGRESS
FIRST SESSION

JULY 11, 2007

Printed for the use of the Committee on Financial Services

Serial No. 11049

(
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WASHINGTON

38389 PDF

2007

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HOUSE COMMITTEE ON FINANCIAL SERVICES

BARNEY FRANK, Massachusetts, Chairman
PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
CAROLYN B. MALONEY, New York
LUIS V. GUTIERREZ, Illinois
ZQUEZ, New York
NYDIA M. VELA
MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
JULIA CARSON, Indiana
BRAD SHERMAN, California
GREGORY W. MEEKS, New York
DENNIS MOORE, Kansas
MICHAEL E. CAPUANO, Massachusetts
N HINOJOSA, Texas
RUBE
WM. LACY CLAY, Missouri
CAROLYN MCCARTHY, New York
JOE BACA, California
STEPHEN F. LYNCH, Massachusetts
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
AL GREEN, Texas
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
GWEN MOORE, Wisconsin,
LINCOLN DAVIS, Tennessee
ALBIO SIRES, New Jersey
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
TIM MAHONEY, Florida
CHARLES A. WILSON, Ohio
ED PERLMUTTER, Colorado
CHRISTOPHER S. MURPHY, Connecticut
JOE DONNELLY, Indiana
ROBERT WEXLER, Florida
JIM MARSHALL, Georgia
DAN BOREN, Oklahoma

SPENCER BACHUS, Alabama

RICHARD H. BAKER, Louisiana
DEBORAH PRYCE, Ohio
MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
FRANK D. LUCAS, Oklahoma
RON PAUL, Texas
PAUL E. GILLMOR, Ohio
STEVEN C. LATOURETTE, Ohio
DONALD A. MANZULLO, Illinois
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
CHRISTOPHER SHAYS, Connecticut
GARY G. MILLER, California
SHELLEY MOORE CAPITO, West Virginia
TOM FEENEY, Florida
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
STEVAN PEARCE, New Mexico
RANDY NEUGEBAUER, Texas
TOM PRICE, Georgia
GEOFF DAVIS, Kentucky
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California
ADAM PUTNAM, Florida
MICHELE BACHMANN, Minnesota
PETER J. ROSKAM, Illinois
KENNY MARCHANT, Texas
THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel

(II)

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SUBCOMMITTEE

ON

FINANCIAL INSTITUTIONS

AND

CONSUMER CREDIT

CAROLYN B. MALONEY, New York, Chairwoman

MELVIN L. WATT, North Carolina
GARY L. ACKERMAN, New York
BRAD SHERMAN, California
LUIS V. GUTIERREZ, Illinois
DENNIS MOORE, Kansas
4PAUL E. KANJORSKI, Pennsylvania
MAXINE WATERS, California
JULIA CARSON, Indiana
N HINOJOSA, Texas
RUBE
CAROLYN MCCARTHY, New York
JOE BACA, California
AL GREEN, Texas
WM. LACY CLAY, Missouri
BRAD MILLER, North Carolina
DAVID SCOTT, Georgia
EMANUEL CLEAVER, Missouri
MELISSA L. BEAN, Illinois
LINCOLN DAVIS, Tennessee
PAUL W. HODES, New Hampshire
KEITH ELLISON, Minnesota
RON KLEIN, Florida
TIM MAHONEY, Florida
CHARLES A. WILSON, Ohio
ED PERLMUTTER, Colorado

PAUL E. GILLMOR, Ohio

TOM PRICE, Georgia
RICHARD H. BAKER, Louisiana
DEBORAH PRYCE, Ohio
MICHAEL N. CASTLE, Delaware
PETER T. KING, New York
EDWARD R. ROYCE, California
STEVEN C. LATOURETTE, Ohio
WALTER B. JONES, JR., North Carolina
JUDY BIGGERT, Illinois
SHELLEY MOORE CAPITO, West Virginia
TOM FEENEY, Florida
JEB HENSARLING, Texas
SCOTT GARRETT, New Jersey
GINNY BROWN-WAITE, Florida
J. GRESHAM BARRETT, South Carolina
JIM GERLACH, Pennsylvania
STEVAN PEARCE, New Mexico
RANDY NEUGEBAUER, Texas
GEOFF DAVIS, Kentucky
PATRICK T. MCHENRY, North Carolina
JOHN CAMPBELL, California

(III)

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CONTENTS
Page

Hearing held on:

July 11, 2007 .....................................................................................................
Appendix:
July 11, 2007 .....................................................................................................

1
25

WITNESSES
WEDNESDAY, JULY 11, 2007
Cunningham, Mary, President & CEO, USA Federal Credit Union, on behalf
of the Credit Union National Association ..........................................................
Feddis, Nessa, Senior Federal Counsel, American Bankers Association ............
Fox, Jean Ann, Director of Consumer Protection, Consumer Federation of
America .................................................................................................................
Halperin, Eric, Director, Washington Office, Center for Responsible Lending ..
Ireland, Oliver I., Partner, Morrison & Foerster LLP ..........................................
Ludwig, Sarah, Executive Director, Neighborhood Economic Development Advocacy Project .......................................................................................................
Wu, Chi Chi, Staff Attorney, National Consumer Law Center ...........................

15
11
17
5
7
13
9

APPENDIX
Prepared statements:
Maloney, Hon. Carolyn ....................................................................................
Carson, Hon. Julia ............................................................................................
Cleaver, Hon. Emanuel ....................................................................................
Cunningham, Mary ..........................................................................................
Feddis, Nessa ....................................................................................................
Fox, Jean Ann ...................................................................................................
Halperin, Eric ...................................................................................................
Ireland, Oliver I. ...............................................................................................
Ludwig, Sarah ...................................................................................................
Wu, Chi Chi ......................................................................................................

26
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40
56
67
78
89
94

(V)

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OVERDRAFT PROTECTION: FAIR

PRACTICES FOR CONSUMERS
Wednesday July 11, 2007

U.S. HOUSE OF REPRESENTATIVES,

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS
AND CONSUMER CREDIT,
COMMITTEE ON FINANCIAL SERVICES,
Washington, D.C.
The subcommittee met, pursuant to notice, at 2:03 p.m., in room
2128, Rayburn House Office Building, Hon. Carolyn B. Maloney
[chairwoman of the subcommittee] presiding.
Members present: Representatives Maloney, Moore, Green, Clay,
Miller, Scott, Cleaver; Gillmor, Price, Hensarling, and Garrett.
Chairwoman MALONEY. This hearing will come to order.
I would like to welcome my colleagues and to welcome all of the
witnesses and thank them very much for being here today, for their
time and for their expertise, and for their testimony.
As a New Yorker, I am keenly aware of the many services financial institutions and credit unions provide their customers.
Banking is my home town industry, from New York City, and I
want it to grow and prosper.
I appreciate that banking in the United States is more accessible,
affordable, and efficient than perhaps any other place in the world.
In my view, banks should be able to charge for their services, including the service of overdraft protection, but consumers, individuals should have notice of this charge ahead of time, and the opportunity to reject the transaction before incurring the charge. Its
that simple.
Hidden overdraft fees are unfair, and fairness is an important
component of a safe and sound banking system.
Customers should be told when they are about to take out more
money than they actually have, and customers should be able to
choose if they want overdraft protections or if they would rather
not pay the fees and not have the transaction.
Customers should be given information about how much overdraft protection plans cost so that they have the opportunity to
compare the cost to other forms of overdraft protection, such as
linking their checking account to their savings account or opening
a line of credit.
These are commonsense, almost due process principles, and they
are the basis of the bill that I have reintroduced in this Congress
with Chairman Frank, H.R. 946, the Consumer Overdraft Protection Fair Practices Act.
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2
Not surprisingly, the data shows that consumers overwhelmingly
want what this bill provides. They want to know if they are going
to pay an overdraft fee, and to be able to cancel the transaction if
they do not wish to pay more.
According to a report released today by the Center for Responsible Lending, overdraft fees accounted for $17.5 billion in 2006, an
increase of 75 percent from the $10 billion annually that the CRL
calculated banks made on overdraft fees in 2004, and again, I am
speaking about numbers that were in the Center for Responsible
Lendings report that they issued today.
Again, my concern is not that banks shouldnt charge for this
service. I think they have every right to charge for services that
they provide the public. But consumers should have the right to decline the service and the fee if they do not wish to have this service.
This bill is modeled on my successful initiative to require disclosure of ATM fees. Everyone is now perfectly comfortable with the
ATM notices that tell you that you may be charged a fee for using
the ATM.
Lots of us use ATMs happily every day. I am very appreciative
of the ability to withdraw money in Washington from my New York
account, and I feel the fee that I opt-in to pay is very fair. Yet, it
is my decision to do so.
When that legislation was first introduced, there was tremendous opposition to it. What some in industry seem to be saying is
that they just do not want to tell the public how much you have
in your account, so they cant tell you if youre going to be overdrawn or not. This strikes me as straining credibility.
First, at most ATMs, you can ask for your balance. Thats part
of the service that they provide.
Secondly, not so long ago, if a customer asked an ATM for more
money than they had in their account, the ATM machine would
simply say no and announce that you were about to overdraw, and
if you wrote a check for more than you had in your account, it
would bounce. This was a service that used to be there, and many
people still mistakenly think that it is still the case.
What I basically want to say is that I believe very strongly in notice, and in the free market process, but I feel that consumers, customers should be notified about a fee or a service and they should
have a chance to decide whether they want to pay that fee or have
that service.
I feel that it is balanced and that it is fair, and I have submitted
this legislation, and I look forward to the comments of my colleagues and the witnesses today on this particular approach.
I thank you all for coming and I yield to my colleague, and ranking member, Mr. Gillmor.
Mr. GILLMOR. Thank you very much, Madam Chairwoman.
I want to thank the chairwoman for calling this hearing to examine recent trends in the use of overdraft protection plans. This is
an issue that I think does deserve committee consideration. Over
the years, the financial services industry has evolved dramatically.
Consumers today are presented with many options to manage their
money.

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Whereas just a decade or so ago, most bank accounts required a
maintenance fee, today the vast majority of banks no longer charge
one, and during this evolution, consumers were also moved away
from the historic overdraft protection in which the bank offered
overdraft coverage only to those customers that it subjectively believed to be reliable.
Currently most consumers have the ability to have their bank account protected in some form or another.
Also, some consumers, under recent Federal guidance, have the
ability to opt-out of this type of protection.
There is little doubt that some Americans are unable to responsibly handle the financial services available to them. That being
said, I do not believe this is a reason to eliminate products from
the market.
The vast majority of consumers with overdraft protection on their
checking accounts use the protection occasionally or never. It is a
benefit to them.
A small minority of consumers, however, repeatedly use the product as a short-term loan.
This is unfortunate and I think it calls for greater consumer education to prevent that, and I look forward to hearing from the industry what solutions are in place for those consumers who fall
into this habit.
With that, I yield back the balance of my time and I thank you
for calling this hearing.
Chairwoman MALONEY. I grant 3 minutes to Congressman
Green.
Mr. GREEN. Thank you, Madam Chairwoman, and I thank the
ranking member as well, and the witnesses who are appearing
today.
This is an important hearing, because it impacts a lot of persons
who obviously are not among those who have the most money, because if they were, they wouldnt have some of these fees attached
to their accounts.
So I thank you for being here. Im looking forward to what you
have to say in terms of testimony.
I approach this with an open mind and look forward to the questions that will follow after weve heard your comments.
I yield back the balance of my time.
Chairwoman MALONEY. The Chair recognizes Congressman Price
for 3 minutes.
Mr. PRICE. I thank the chairwoman, and I want to thank the
chairwoman and the ranking member for holding this important
hearing on really what I see as an important issue of overdraft protection.
Thanks to thoughtful amendments to Regulation DD, and interagency guidance since 2002, consumers are now provided with uniform and adequate disclosure information concerning bounced
checks and courtesy overdraft protection services. This has allowed
consumers to continue to enjoy what has become an increasingly
fast, accessible banking system.
The benefits these programs provide is that consumers will avoid
a merchants returned check fee and will stay in good standing
with those with whom they do business.

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4
Many consumers already realize the importance of this protection because most have been charged a fee by their bank for inadvertently exceeding their overdraft limit, and I dont believe its
necessarily limited to those with lower financial means. I suspect
that this runs the gamut across our society.
Many banks, as well as savings and loans and credit unions, indeed offer courtesy overdraft protection or bounce coverage plans so
that the checks do not bounce, and individuals ATM and debit card
transactions go through, and with these plans, people obviously
still pay an overdraft fee or bounce coverage fee to the bank or
credit union or savings and loan for each item.
This is a service provided by the banks and the credit unions to
their valued customers, but it may be one that costs them money.
It certainly does cost them money, which is then appropriately
charged to the consumer.
We may hear today from some witnesses and other members that
there needs to be a legislative solution to overdraft charges for consumers.
It strikes me that Congress needs to be very careful when wading into the marketplace because overreaching on our part with
legislation would very possibly cause banks and credit unions to
stop offering overdraft protection as a product and I doubt that
anyone here today wants that.
I, for one, dont want to have to go back home to my constituents
and explain why their bank no longer is offering them overdraft
protection.
I do have a number of questions and I hope to be able to stick
around for the question and answer period, but one Id like to hear
the entire panels thoughts on, my understanding is that under
many loan terms, a failure to pay for which a bounced check would
qualify often makes the loan due.
For example, if you fail to make a car loan payment, that would
likely make the car loan due. Wouldnt that, isnt that more expensive and burdensome to consumers than a market-driven overdraft
fee?
And I would ask you to consider giving an opinion about the unintended consequences of meddling in this area.
I want to thank the entire panel for coming. I look forward to
your testimony and to the Q&A period, and I yield back the balance of my time.
Chairwoman MALONEY. The Chair recognizes Mr. Scott from
Georgia for 3 minutes.
Mr. SCOTT. Thank you.
This is a very important hearing. Overdraft fee protection is very
important, and we hear a lot of complaints about it from consumers.
Banks have their challenges in terms of whether or not they
have the technology in place to do it at the right time and under
the right circumstances. And I understand the importance of personal responsibility of ones financial life, very important.
There are certain practices, however, occurring in the industry
that do seem to be misleading and could be interpreted as being
unfair.

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For example, I think it would be good for us to discuss today why
most banks are not automatically warning, or rather most banks
are not allowing a transaction to go through when a customer does
not have the sufficient funds. Thats sort of at the core of the matter.
The bank knows there are not sufficient funds there. Why would
you let the transaction go through anyway, and especially when we
know that theres a fee being paid for that overdraft?
In other words, are we in the banking industry trying to make
money off of the fact that the person doesnt have the money there,
and the bank knows the person doesnt have the money there, so
why couldnt there be an automatic warning to that effect?
And believe me, Im not here to beat up on banks, because they
have their challenges, and for the most part really are doing a very
important job and providing an extremely important service.
However, I do want to express concerns regarding the fact that
many banks have claimed one of their most profitable services is,
in fact, overdraft lending, especially just at the residential mortgages.
This is an area that I think we really need to examine very, very
closely, for when a customer sees his statement that says, Your
funds have not yet cleared, this can be frustrating, and further,
receiving a clear answer from the bank is often quite difficult.
So, Madam Chairwoman, I think this is a very important and
timely hearing, and I look forward to exploring that central question further as we go forward, which I think gets to the core of the
matter.
Thank you.
Chairwoman MALONEY. The gentlemans time has expired.
We have a distinguished panel today:
Mr. Eric Halperin, director of the Washington Office of the Center for Responsible Lending;
Mr. Oliver L. Ireland, who is a partner of Morrison & Foerster,
and was formerly an attorney with the Federal Reserve, the Associate General Counsel;
Ms. Chi Chi Wu, staff attorney for the National Consumer Law
Center;
Ms. Nessa Feddis, senior Federal counsel for the American Bankers Association;
Ms. Sarah Ludwig, executive director of Neighborhood Economic
Development Advocacy Projecta New York based organization
that helps low and moderate income people with their credit concerns;
Ms. Mary Cunningham, president and CEO, USA Federal Credit
Union, on behalf of the Credit Union National Association;
And Ms. Jean Ann Fox, director of consumer protection, Consumer Federation of America.
I thank all of you for coming.
Mr. Halperin.
STATEMENT OF ERIC HALPERIN, DIRECTOR, WASHINGTON
OFFICE, CENTER FOR RESPONSIBLE LENDING

Mr. HALPERIN. Chairwoman Maloney, Ranking Member Gillmor,

and members of the committee, thank you for holding this hearing

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6
and bringing to light an abusive banking practice that now costs
Americans $17.5 billion a year.
I serve as the director of the Washington office of the Center for
Responsible Lending, a nonprofit research and policy organization
that is committed to protecting family wealth.
Were also an affiliate of Self-Help, which has a nonprofit loan
fund and a credit union.
Today I will summarize CRLs research on overdraft loans and
offer our strong support for H.R. 946.
H.R. 946 will make a simple, yet powerful improvement in the
marketplace by giving consumers important information and also
providing them the opportunity to choose whether or not to take
out a high-cost overdraft loan.
Common banking practices now increase the number of overdrafts rather than minimize them, and can cost account holders
hundreds of dollars in a matter of hours.
Under the old system, fees were primarily assessed to discourage
overdrafts. If a customer wanted their overdrafts regularly covered,
they arranged to have a line of credit or a transfer from a savings
account to cover those overdrafts. Now, banks automatically enroll
people in an overdraft loan program.
When a customer who is an overdraft loan program goes to make
a purchase, for example, in a store, for $20, with their debit card,
even if they only have $5 in their account, the bank will now let
that transaction go through, where in the past they would have
perhaps denied that transaction without charging a fee. They do
not warn. And then they extend the customer a loan of $15, for a
fee of $34. That loan is repaid automatically when the customers
next deposit hits their account.
As I mentioned this morning, we released a report putting the
cost of overdraft loans at $17.5 billion a year. In a system that is
enormously out of balance, that $17.5 billion in fees is only for
$15.8 billion in credit extended. The loan fees are more than the
amount that people are borrowing. And most of that $17.5 billion
is paid by low and middle income families.
In a 2006 CRL report, we found that just 16 percent of the overdraft users pay 70 percent of the fees. There is a small group of
users that pay almost all the fees, and those users are more likely
to be low and middle income families.
And it is no longer about the check, although these systems
started by primarily focussing on covering a paper check. Now,
ATM and debit card point-of-sale transactions account for almost
half of all transactions that trigger an overdraft.
This shift, a dramatic shift in the market, occurred since 2003
or 2004, when it was estimated that 80 percent of financial institutions would not routinely cover overdrafts through debit cards.
Debit card overdrafts are also extremely expensive for consumers. Because the transaction amounts for debit card purchases
are often very small, consumers end up paying approximately $2
in fees for every dollar of credit they get when they do a debit card
overdraft.
This accounts for $7.8 billion in fees paid per year, and these fees
are easily preventable, either with a warning or a return to the
system where those transactions were denied without a fee being

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7
charged unless the consumer had chosen ahead of time, affirmatively made the choice ahead of time to enroll in a program such
as a line of credit or a transfer from savings that would allow their
overdrafts to be covered.
H.R. 946 provides a straightforward and commonsense solution
to many of these abuses. Truth in Lending Act coverage will give
the consumers the important information they need to make a decision.
Requiring that a consumer give their written consent to participate in these programs will ensure that a consumer is making the
decision about participating in the most expensive credit program
that their bank offers.
Providing a warning at the ATM and on a debit card purchase
before an overdraft occurs will ensure that the consumer decides
whether they want to pay $33 for a cup of coffee.
And finally, prohibiting financial institutions from manipulating
the order of checks when they come into their account, changing
the order into the largest check clearing first to the smallest, will
prevent consumers from needlessly paying overdraft fees merely
because their bank changed the order in which their checks were
processed.
Thank you again for inviting us in to testify, and I look forward
to answering your questions.
[The prepared statement of Mr. Halperin can be found on page
67 of the appendix.]
Chairwoman MALONEY. Mr. Ireland.
STATEMENT OF OLIVER I. IRELAND, PARTNER, MORRISON &
FOERSTER LLP

Mr. IRELAND. Thank you, Chairwoman Maloney, Ranking Member Gillmor, and members of the committee.
My name is Oliver Ireland, and Im a partner in the financial
services practice of Morrison & Foerster here in Washington.
I have over 30 years experience in financial services issues, over
25 of those years with the Federal Reserve system, and 15 years
as an Associate General Counsel with the Board here in Washington. Since the year 2000, Ive been in private practice.
I have to say that the issue that has probably occupied more of
my attention during those 30 years than any other single issue has
been payment practices, including overdraft practices, overdraft
practices ranging from retail overdrafts to overdrafts by banks at
Federal Reserve banks and even overdrafts by Federal agencies at
Federal Reserve banks.
I share your aspirations, Chairwoman Maloney, for payment systems that deal in real time, final funds, so everybody knows what
their account balance is and can make informed decisions about it
at the time they do a transaction.
Unfortunately, thats not the world we live in today. Its not the
world weve lived in in the past. And I think its still a ways away.
Overdrafts are a fact of life in the payment process. Businesses
incur overdrafts. Banks incur overdrafts. High and low-income consumers incur overdrafts.
The banks Ive talked to that offer overdraft services to their customers tell me that those services are used across the economic

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8
spectrum, that theyre not concentrated in any particular economic
strata such as low or moderate income consumers.
And as I indicated, even government agencies have been known
to overdraw their accounts for short periods of time.
Many of these overdrafts result because of imprecisions in the accounting and posting process, mail delays, all kinds of operational
issues that arise in the payment process where people think they
have money or should have money by a given point in time, but
its not yet available to cover payments.
Banks have been providing overdraft services and paying overdraft services in order to deal with those kinds of problems for decades, and the reason theyve done that is the importance of completing transactions in the real economy.
The consequences of a failed transaction are not apparent to the
bank who is processing the payment.
Nevertheless, those consequences can be orders of magnitude
larger than the amount of the transaction which itself may be orders of magnitude larger than the overdraft that would be created
by completing the transaction.
So banks have historically endeavored to pay overdrafts for their
customers as a payment service associated with managing transaction accounts for their customers.
To be sure, those products and that practice has been abused in
the past.
We have had dramatic examples of individuals who find out that
their banks will accommodate those overdrafts and use them as a
vehicle for short-term loans or even longer-term loans if they can
hold off the banks collection efforts.
However, the principal focus of overdrafts in the banking system
has historically been the making and completion of payments, rather than as a lending and credit vehicle.
Today the overdraft process has become automated. It used to be
a manual process. Payment processing itself is highly automated
and is highly efficient.
That automation in the overdraft process has made the ability to
complete payments through overdrafts available to all bank customers or many bank customers that it was not available to before,
where it was limited to select groups that may be known to individual bank officers.
There are also significant consequences to making mistakes in
the payment process.
For these reasons, and the degree of automation, the policy options that are available for changing payment processes and current payment procedures have to be considered very carefully, and
tend to be limited.
I can remember when I was at the Federal Reserve and we were
trying to put in effect our own overdraft payment process for Fed
Wire transactions, which are large dollar corporate payments initiated by banks, and the Fed Wire software manager would sit in the
room and wed come up with a policy program to reduce overdrafts,
and hed say, You cant do it, he had to veto, simply because the
operation wouldnt support it.
Operations obviously can change.

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Chairwoman MALONEY. The Chair grants the gentleman 30 additional seconds. Your time has expired.
Mr. IRELAND. Operations can change, but I think its going to be
a difficult process.
I would like to say, however, that I do think youve identified another important issue, and that is that fees for overdrafts can,
which have been imposed, can often exceed the value of the service,
and there needs to be some way to control those fees.
Banking agency guidance today requires banks both to cap the
fees and to give customers an opportunity to opt-out of overdraft
payment.
Thank you. Id be happy to answer any of your questions.
[The prepared statement of Mr. Ireland can be found on page 78
of the appendix.]
Chairwoman MALONEY. Thank you very much.
Ms. Wu.
STATEMENT OF CHI CHI WU, STAFF ATTORNEY, NATIONAL
CONSUMER LAW CENTER

Ms. WU. Madam Chairwoman, Representative Gillmor, and

members of the subcommittee, thank you very much for inviting
me here today. Im testifying on behalf of the low-income clients of
the National Consumer Law Center.
Madam Chairwoman, thank you for holding this hearing and for
introducing H.R. 946. This bill will go a long way in addressing the
abuses of overdraft loan programs, and unfortunately, these abuses
are many.
One of the abuses is that overdraft loans are one of the few forms
of involuntary credit. They are crammed, or imposed on consumers who have not requested them. Consumers who dont want
this form of credit are forced to actively contact their banks to optout.
Some consumers may not be aware, until they overdraw their account, that theyre accessing a high-cost credit product, especially
true in the ATM or debit card context, where transactions that
would overdraw an account were previously declined and no fee
was imposed.
Now, Mr. Ireland talked about how overdrafts are unavoidable,
and implying so even in the ATM and debit card context.
There may be accidental overdrafts, but what is the egregious
and unconscionable practice is when a bank intentionally programs
their computers to approve an ATM or debit card withdrawal when
they know the transaction will overdraw the account.
And to show that is happening, here is a statement from Bank
of America in 2005:
In our ongoing efforts to make banking easier with us, our goal
is to authorize more transactions made using your ATM or check
card, even if it creates an overdraft on your account.
This is not accidental. This is deliberate.
Now, there has been an issue raised as to whether overdraft
loans are a form of credit. They are unquestionably a form of credit. They are credit as defined under the Truth in Lending Act, the
right to incur debt and defer its payment.

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When a bank lets a consumer use the banks funds to pay for an
overdraft and then requires the consumer to repay the bank, its
granting the right to incur debt and defer its payment.
Regulator after regulator, from the OCC to State banking departments, including the Federal Reserve Board, have stated that overdraft loans are a form of credit, and even the Fed Wire overdrafts
that Mr. Ireland talked about are considered a form of credit.
Furthermore, when banks cram these overdraft loans onto
banking accounts, its a default product. They typically dont engage in any underwriting.
Unlike traditional, affordable lines of credit, banks dont assess
a consumers ability to pay. They make sure these programs are
profitable by charging huge fees, providing huge profit margins as
well as covering any alleged risk.
Now, despite the fact that overdraft loans are credit, banks dont
need to make Truth in Lending disclosures. You see, in 1969, the
Federal Reserve Board exempted overdraft fees from the definition
of finance charge.
This exemption was reasonable, maybe, in 1969, when all we had
was the traditional bankers courtesy of occasionally paying an
overdraft on an ad hoc basis as a customer accommodation. But
banks have exploited this exemption, creating high-cost, automated
credit programs while avoiding Truth in Lending disclosures.
Now, the Fed had the opportunity to close this gaping loophole
and require Truth in Lending disclosures. Instead, the Fed chose
to regulate them under the less effective Truth in Savings Act,
which undermines the Truth in Lending Acts core purpose in promoting the informed use of credit.
Without the APR disclosure required by Truth in Lending, consumers have no way to compare an overdraft loan to other credit
transactions, such as a payday loan, an auto title loan, or a credit
card cash advance.
Under the Feds regulation, the disclosed APR for a typical payday loan is 400 percent, but for an overdraft loan program, the
lender can disclose that the account is actually earning interest
under Truth in Savings.
And under Truth in Lending, as well as for all practical purposes, ATM and debit cards that access overdraft loans are transformed into super-expensive credit cards.
For example, this is a typical debit card. It even has a
MasterCard logo on it. If my bank allows me to use its money to
pay for purchases, what makes it different from other credit cards
in my wallet, except for the steep fee?
Now, by the way, Ive heard some argument that it would be difficult to calculate an APR because the bank doesnt know how long
in advance the loan is outstanding for.
But you have the same issue with credit cards fees, like cash advance fees, and Congress built into the Truth in Lending Act a way
disclose an APR for credit card fees.
In fact, H.R. 946 actually deals with this issue and requires overdraft loan fees to be disclosed using a fee-inclusive APR similar to
credit cards.

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Finally, I want to talk about how overdraft loans can cause financial hardships when they seize Social Security or other Federal
payments to repay them.
Federal law is supposed to protect these benefits, and indeed, the
only creditors that can touch them are the U.S. Government itself
and banks when they take or offset protected Social Security and
other benefits to pay for overdraft loans and fees.
H.R. 946 would address many of the problems discussed today
and prohibit the cramming of overdraft loans by requiring banks
to obtain real consent. It would require Truth in Lending disclosures and it would require banks to warn consumers and give them
an opportunity to cancel before an ATM or debit card transaction
will overdraw an account.
We thank you for the opportunity to testify and look forward to
working with the chairwoman and other members of the subcommittee on H.R. 946. Thank you.
[The prepared statement of Ms. Wu can be found on page 94 of
the appendix.]
Chairwoman MALONEY. Ms. Feddis.
STATEMENT OF NESSA FEDDIS, SENIOR FEDERAL COUNSEL,
AMERICAN BANKERS ASSOCIATION

Ms. FEDDIS. Thank you.

Madam Chairwoman and members of the subcommittee, my
name is Nessa Feddis, and I am the senior Federal counsel for the
American Bankers Association. I am pleased to be here today to
represent the ABA on the issue of overdraft policies and practices
of banks.
As you note, Madam Chairwoman, the American consumers
enjoy the most affordable, efficient, and accessible banking in the
world. Consumers can open a checking account with a small deposit and have access to an entire menu of payment services at little or no cost. They can write checks, use debit cards to withdraw
cash or make purchases, pay bills, and make funds transfers day
or night, around the globe.
In the best of all worlds, people would only write a check or
make an electronic payment when there are sufficient funds in
their account. Of course, this isnt a perfect world. For this reason,
banks have traditionally accommodated customers when they inadvertently overdraw their account. Consumers value banks practice
of paying overdrafts. Indeed, they expect it.
They avoid the embarrassment, hassle, costs, and other adverse
consequences of having a payment returned or a transaction denied. Returning a payment for a merchant, for a mortgage company, a credit card company, usually means the consumer pays additional fees charged by the person receiving the payment.
Consumers also value having debit card transactions approved
even when there are insufficient funds. For example, many consumers would rather their deposit institution authorize the debit
transaction than face the consequences of not being able to pay for
a meal theyve just consumed or the groceries that have already
been rung up and bagged.
Consumers are in control and can avoid overdraft fees. Keeping
track of transactions is critical to overdrawing an account. This, of

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course, is not always a pleasant task, and most of us would like
to avoid it altogether, but doing so is an important responsibility
of using a transaction account.
The bottom line is that consumers are in the best position to
know what their actual balance is. Only they know which checks
that they have written, automatic payments they have authorized,
and debit transactions they have approved.
However, even if individuals do not keep an accurate, up to date
record of their transactions, its easy for them to check their balance. They can check their balances by phone, at the ATM, online,
or using the Internet browser on a phone or other handheld device.
Customers who find it challenging to manage their accounts have
other options available to them. Many simply maintain a cushion.
Others establish a line of credit or arrange for overdrafts to be covered by automatic transfers from a savings account or to a credit
card account.
In addition, most banks permit customers to opt-out of having
overdrafts authorized or paid.
Banks will also often waive the fee for an initial or occasional
overdraft. After the first incident, however, the consumer is then
aware that debit card transactions, for example, may cause an
overdraft.
Of course, consumers dissatisfied with their banks services have
many other banks to choose from in a very competitive industry.
The banking industry and regulators have been and will continue
to be responsive to consumer concerns about overdraft fees.
ABA, in March 2003, in a letter to members, urged caution with
regard to overdraft practices, and following that, published extensive guidelines for best practices.
In addition, in 2005, the banking agencies adopted their overdraft protection program guidance, which the industry adopted and
fully supports.
The Federal Reserve Board went further to address concerns
about consumer understanding of the cost of overdrafts by amending the Truth in Savings Acts Regulation DD.
We believe that the industrys initiative, along with the industrys guidance, and important changes to Regulation DD, have addressed concerns about overdraft protection programs.
Madam Chairwoman, the ABA appreciates the opportunity to
present our views on this subject. We believe that overdraft accommodation services are important to our customers and we will continue to work, as weve done in the past, to make sure that customers understand the responsibilities for tracking accounts, the
fees associated with overdrafts, and the strategies to avoid them.
I will be happy to answer questions that you or the subcommittee
members may have.
Thank you.
[The prepared statement of Ms. Feddis can be found on page 40
of the appendix.]
Chairwoman MALONEY. Thank you so much.
Ms. Ludwig.

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13
STATEMENT OF SARAH LUDWIG, EXECUTIVE
NEIGHBORHOOD ECONOMIC DEVELOPMENT
PROJECT

DIRECTOR,
ADVOCACY

Ms. LUDWIG. Chairwoman Maloney, Ranking Member Gillmor,

and members of the subcommittee, thank you for holding todays
hearing.
My name is Sarah Ludwig, and Im executive director of NEDAP,
the Neighborhood Economic Development Advocacy Project, which
is based in New York City.
NEDAP believes that everyone has the right to live in a decent,
safe, and thriving community, and that fair access to credit and financial services is key to ensuring a communitys vitality and economic inclusion for all its residents.
Im here today to tell you about NEDAPs on-the-ground experience working with low-income New Yorkers who have been harmed
by abusive overdraft loans.
Through our extensive community financial education programs,
as well as our consumer law hotline, we encounter people with
problems with overdraft protection every day.
I will also share with you New York States recent experience
with respect to deregulating bounce protection for State-chartered
institutions and underscore why it is so crucial for Congress to
enact legislation like H.R. 946.
In the 11 years since NEDAP was founded, weve observed a dramatic shift in the nature and delivery of financial services in New
York City and around the country.
New York City neighborhoods that were historically cut off from
access to fair and affordable financial services are now flooded with
solicitations for high-cost, often fringe and predatory financial services and credit.
Weve all seen the advertisements: Bad credit? No problem.
Need cash fast? Call us.
NEDAP therefore dedicates considerable resources to educating
lower-income consumers on how to avoid abusive credit and asset
stripping products and services, and how they can make sound financial choices and understand their rights as financial services
consumers.
It used to be a no-brainer for us to recommend to people who
dont have bank accounts that they should go out immediately and
get a bank or credit union account, but bounce protection blurs the
lines between mainstream and fringe banking, and it can be a financial land mine for people living on limited means.
Seeing the hardship that abusive overdraft protection has caused
so many of our workshop participants and so many of our consumer law hotlines, NEDAP is now hard-pressed to recommend
categorically that people open bank accounts. Too many people end
up learning that their account has bounce protection the hard way,
after theyve overdrawn and fees have mounted.
Routinely, they dont know that they have an overdraft protection feature on the account. They didnt apply for it. Its not disclosed, as it would be under H.R. 946.
Many people believed they had sufficient funds in their account,
understandably, because the transaction, either at the ATM or the
point of sale, was approved.

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14
Many families have told us their accounts were closed because
they could not afford to pay hefty bounce protection fees, which
bear no relation to the amount overdrawn or to the risk to the financial institution.
When bounce protection is triggered and an account is closed ultimately, if that happens, the information is reported to Check Systems, which is a reporting agency that tracks and sells information
on a persons bounced checks, their debts owed to a bank, and any
other so-called account mishandling.
Check Systems functions effectively as a bank account blacklist,
and NEDAP can cite numerous examples of low-income New Yorkers who are now blocked from opening a bank account because of
past difficulties theyve had with bounce protection, and it is next
to impossible for account holders to opt-out of bounce protection or
to get a bank to remove it if they request it.
In my written testimony is a case example that I wont go into
right now, but its of a client of ours named David A., and Ill tell
you just broadly that he is a man who is deaf, whose sole source
of income is Supplemental Security Income, SSI, and he triggered
bounce protection 2 years ago with a charge of $3.44 that he was
unaware of, and didnt know until many weeks later, after he had
a spiral of overdrafts, that he had in fact triggered this provision
that he didnt know that he had. After many months of difficulty,
he ended up with $1.83 in his account and the account was closed
for failure to maintain a positive balance.
His account contained only his SSI benefits, income that should
be statutorily protected and should not have been debited from his
account to set off the overdraft charges. Again, this is more detailed in the written testimony.
NEDAP supports passage of a law like H.R. 946, which would set
a strong and sorely needed Federal standard.
In 2005, the New York State Banking Board deregulated our
States longstanding prohibition against bounce protection as a defensive measure to retain State chartered banks that reportedly
were threatening to give up their State charter and go for a national one so that they, too, could offer this lucrative product.
Then-Superintendent Diana Taylor explained the New York
State Banking Departments impending deregulation this way, and
I quote:
The ability of the federal banking regulators to preempt state
law has increasingly meant that state regulators must choose between allowing their banks to do whatever federal regulators allow
national banks to do or face the prospect that banks in the state
will achieve the same result by simply switching to the federally
regulated or national charter.
Chairwoman MALONEY. The Chair grants the gentlelady 30 additional seconds. Your time has expired.
Ms. LUDWIG. Thank you.
H.R. 946 would halt this race to the bottom at the State level
and fill the Federal regulatory vacuum we now face.
In sum, during the debate over whether New York State should
allow bounce protection a couple years ago, industry representatives stated that account holders were in fact clamoring for overdraft protectionIm not talking about lines of credit, but the

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15
bounce protection and the courtesy overdraftand that banks that
offered it were simply responding to consumer demand.
But they failed to produce any evidence to substantiate that consumers were clamoring for this bounce protection or this courtesy
overdraft. On the contrary, whenever we explain it to people at
consumer workshops, they tell us that they consider it an exploitative product, one to be avoided at all costs.
The industry representatives failed to explain why, if consumers
are so eager to have the product, its tacked onto accounts without
consumers knowledge or consent, and why if they have consumers
best interests in mind, they market free checking accounts with
bounce protection so aggressively to young people and others with
low incomes whom they count on to overdraw.
I look forward to answering any questions that you may have.
[The prepared statement of Ms. Ludwig can be found on page 89
of the appendix.]
Chairwoman MALONEY. The gentleladys time has expired.
Ms. Cunningham.
STATEMENT OF MARY CUNNINGHAM, PRESIDENT/CEO, USA
FEDERAL CREDIT UNION, ON BEHALF OF THE CREDIT
UNION NATIONAL ASSOCIATION (CUNA)

Ms. CUNNINGHAM. Chairwoman Maloney, Ranking Member

Gillmor, and members of the subcommittee, thanks for holding this
hearing on H.R. 946. My name is Mary Cunningham, and I actually work for a financial institution that handles these programs
I am president and CEO of USA Federal Credit Union in San
Diego.
I am here on behalf of CUNA, which is the Nations largest credit
union advocacy organization representing over 90 percent of the
Nations 8,800 State and Federal credit unions.
We are predominantly a military based credit union, servicing
60,000 members. We operate a network of 23 branches, including
11 branches in Japan and Korea, all located on military installations.
We provide a wide variety of financial services to meet the needs
of our unique market, including low-cost payday loan alternatives,
affordable mortgage products, small business services, this overdraft protection service, as well as many other things for the members.
Madam Chairwoman, credit unions have long been involved in
providing some form of overdraft or bounced check protection. However, these programs vary, due to the unique fields of memberships
of credit unions. Many of these programs have changed over time
in response to the members needs and usage.
Shortly after introducing our program in the fall of 2003, early
results were, in fact, troubling; 26 percent of those using privilege
pay were less than 25 years of age. For a military credit union, we
considered this to be disturbing news.
Forty-four percent of our users accessed the service between two
and five times per month. Thirty-seven percent of these users were
chronic overdrafters prior to implementation of the product. Once
implemented, an additional 28 percent became chronic abusers.

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We also learned that roughly 75 percent of all of our overdrafts
resulting in privilege pay were triggered by ATM activity.
Credit unions have a rich history of providing a fair deal to consumerslow rates on loans, high savings rates, and modest fees.
But instead of privilege pay being used as we had intended, a number of our members chose to use it as a no-qualifying line of credit.
For a member who lives paycheck-to-paycheck, these fees add up
very quickly. Once a member maxed out his privilege pay limit, the
next paycheck was automatically spent once deposited, thereby creating a downward spiral for the member. When that happens, we
are no longer offering the fair deal. Were adding to his problems.
To be fair, weve also received testimonials from members who
were very grateful that the math errors in their checkbook didnt
result in the embarrassment and expense of a returned check.
So our challenge was this: How do we offer a sensible product
that members can rely on to save them the embarrassment of having a check returned, while at the same time ensuring that controls
are put in place to help members to help themselves?
We made several modifications to our product, many of which
mirror the main points in your proposed legislation.
Number one, our privilege pay product is offered to members at
the time the checking account is opened, along with the transfer
from savings option and the overdraft line of credit loan option.
The member is informed that they will qualify for privilege pay
after 30 days in good standing and aggregate deposits of at least
$750, unless they choose not to have the service.
Your bill would require members to proactively enroll in a program. They would be provided disclosures. Credit unions would
agree with this.
Number two, we follow a practice of liberally refunding fees
while educating the members about the service. We also encourage
members to opt-out if they decide they dont want the service. Free
financial counseling is also made available.
Number three, part of that education consists of explaining to
members how the clearing process works. At our credit union, all
items are cleared in ascending order by dollar amount with the
smallest dollar amount being cleared first. We always post credits
to the accounts first, and then debits. This helps to minimize the
fees. Your bill would prohibit financial institutions from manipulating the process of posting these items to generate overdrafts and
fee incomes. Credit unions would agree.
Number four, we also inform the member that our system first
attempts to transfer from savings, then to a line of credit overdraft
loan, and then finally, to privilege pay as a last resort.
While these programs are offered at the time the checking account is established, none are overtly marketed to members, which
is consistent with your bill. Once again, credit unions would agree.
Number five, when the member makes a withdrawal at an ATM,
the actual balance is disclosed, not the available balance through
privilege pay. We did ask our processor if a notice could be provided at the ATM warning the member that they were triggering
privilege pay, but we were told this was unavailable.
While I agree with your bills recommendation that such a notice
should be provided, I will tell you that few credit unions operate

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their own ATM networks, and would be unable to ensure compliance on their own, so I would encourage sufficient time for phasing
in this provision to enable third party providers to make the necessary adjustments.
Finally, your bill attempts to ensure that fees for privilege pay
be conspicuously disclosed in a separate periodic statement with
the calculation of the APR. Credit unions would agree and clearly
support disclosure of all costs related to these programs.
However, depending upon how that fee is defined and included
in the APR calculations, it could easily exceed the credit unions
statutory 18 percent
Chairwoman MALONEY. The Chair grants the gentlelady an additional 30 seconds.
Ms. CUNNINGHAM. rate ceiling, and this would force most credit unions to stop providing this service.
My written testimony would outline alternatives for your consideration.
In summary, Madam Chairwoman, we view privilege pay as one
of those programs that, like many things in life, can be a wonderful
tool if the consumer uses it in the appropriate way, but also like
many things, when taken to excess, it can certainly do damage to
the consumer and add to their financial burdens.
From our perspective, your bill would protect the interests and
pocketbooks of consumers. Credit unions share this goal and applaud your efforts.
Thank you very much. Im available for questions.
[The prepared statement of Ms. Cunningham can be found on
page 33 of the appendix.]
Chairwoman MALONEY. Thank you.
Ms. Fox.
STATEMENT OF JEAN ANN FOX, DIRECTOR OF CONSUMER
PROTECTION, CONSUMER FEDERATION OF AMERICA

Ms. FOX. Chairwoman Maloney, Ranking Member Gillmor, and

members of the subcommittee, Im Jean Ann Fox, director of consumer protection for Consumer Federation of America, an association of 300 consumer groups who represent 50 million consumers.
I appreciate this opportunity to speak in support of H.R. 946, the
Consumer Overdraft Protection Fair Practices Act.
I make three main points in my testimony:
One, consumers strongly oppose bank overdraft practices, according to national polls that CFA has conducted;
Two, big banks charge high fees, they use tactics to cause more
overdrafts, and they structure fees to trap consumers in debt;
And three, the Federal Reserve is failing to protect consumers
from abusive overdraft loans.
Were not talking about your traditional overdraft protection that
consumers apply for and qualify for, and that use the consumers
own money to cover the occasional overdraft.
Your legislation will stop banks from operating as payday lenders, trapping their most vulnerable customers in a debt spiral
while charging astronomical interest rates on short-term loans to
consumers. A $100 overdraft repaid in 2 weeks at a $35 typical
overdraft fee translates to 910 percent annual interest.

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Consumers think that bank practices with overdraft loans are
unfair. Almost 70 percent of consumers in a national poll told us
that it is unfair for banks to permit overdrafts without obtaining
their customers consent. Eighty-two percent of consumers in the
poll said it is unfair for banks to permit overdrafts without any notice at the ATM, and 68 percent of themexcuse me63 percent
of them said it was very unfair.
Over 80 percent of the largest banks in the country have fine
print in their account agreements that permit overdrafts for a fee.
The 10 largest banks charge fees ranging from $20 to $35.
The current average is $33.75 per overdraft, once youve done it
more than a couple of times during a year. These fees have gone
up over $5 in the last 2 years, so fees are on the increase.
Bankers claim that fees are set high in order to deter misuse of
bank accounts, but bankers have given their customers permission,
and encourage them to overdraw their accounts, which removes
this justification for such high fees.
Banks also charge tiered fees, which adds to the debt trap for
consumers. For example, Bank of America charges $20 for each of
up to 5 overdrafts in a single day in the 12-month period. After
that, if you overdraw, youll pay $35 each for up to 5 overdrafts in
a day, and its easy to have 5 overdrafts if youve used your debit
card as youve gone through the day.
Many banks also charge sustained overdraft fees so that after
youve been overdrawn for a few days, youll start paying by the
day. For example, First Third Bank charges $33 when you overdraw, and $6 a day until that overdraft is repaid.
Banks continue to come up with more ways to charge overdraft
fees. Bank of America just notified its customers that starting in
August, customers will be charged for prospective overdrafts when
pending debit transactions tied up customers funds currently
available in their bank account.
Bankers also manipulate the order of processing deposits and
withdrawals in order to maximize the number of transactions that
trigger an overdraft fee.
CFAs 2005 study of the 33 largest banks found that almost
three-quarters of large banks either process withdrawals largest to
smallest or reserve the right to do so. This processing order can result in multiple fees for consumers who are living paycheck-to-paycheck.
For example, one banks customer had a $100 check clear that
he hadnt expected to go to the bank. It caused 8 small transactions
totaling $50 to overdraw and triggered $264 in overdraft fees. If
that bank had cleared smallest to largest, he would have only paid
one $33 fee.
Bankers justify their high to low check clearing practice by
claiming that consumers want the largest payment to be processed
first because it might be the mortgage or an important payment,
so we asked consumers a few years ago whether they agreed with
the bankers, and only 13 percent of them did.
In our poll, 65 percent of
Chairwoman MALONEY. The gentlewomans time has expired.
I grant the gentlelady 30 additional seconds.

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Ms. FOX. our consumers think its extremely unfair for banks
to clear their transactions high to low.
I promised you a third point.
We believe that the Federal Reserve has failed to protect consumers from high-cost overdraft loans by failing to cover them in
Truth in Lending and the other regulators have only enacted voluntary best practice guidelines that fail to protect consumers.
We support your bill, and thank you for the opportunity.
[The prepared statement of Ms. Fox can be found on page 56 of
the appendix.]
Chairwoman MALONEY. Thank you. Without objection, all members opening statements will be made part of the record.
And I would like to note that weve been called for a vote. Its
estimated that this voting series will last one hour.
So I yield to my colleague, Ranking Member Gillmor, to begin the
questioning.
Mr. GILLMOR. I thank the chairwoman for her courtesy.
In terms of, I think it was Ms. Ludwig said on education, and
thats part of what you do, I think that is a very important thing,
and if you had good consumer education, I think a lot of these problems would go away.
I recently convened a meeting of a large group of Ohio financial
institutions, regulators, and consumer groups to talk about the serious foreclosure problems we have in Ohio, and the conclusion of
that meeting really surprised me, because all three of those groups
said that the single most important thing you could do to prevent
foreclosures would be better education, that those consumers who
were counseled adequately before they got in the deal, didnt have
foreclosures.
And the other thing that came out was that disclosure is sometimes nondisclosure. They have so much disclosure in mortgages
that it amounts to nondisclosure, because nobody reads an inch of
paper, so its not effective. So I just brought that up to follow up
on what you had said.
Let me ask Ms. Feddis, you state in your testimony that consumers want their overdraft checks paid and not returned to the
merchant. Do you have any statistics or any proof on that?
Ms. FEDDIS. Well, the Center for Responsible Lending back in
February came out with a report that showed that 94 percent of
people do want their overdrafts paid.
The question was: Say you make a purchase and did not have
enough in your checking account to cover it. Given the following
choices, how would you want your bank to handle your overdraft?
And it listed, you know, give me an overdraft line of credit, and 94
percent of people wanted their overdrafts covered.
Mr. GILLMOR. You also touched on in your testimony, and I want
to follow up, in Ms. Foxs written testimony she said, Deliberate
bank practices and advances in technology make it harder than
ever for consumers to keep track of the balance in their bank accounts to avoid overdrafts.
Would it also be true that those same advances make it easier
for consumers to get real-time account updates, either by phone or
by the Internet or even at their ATM machines?
Either you or Ms. Feddis or both.

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20
Ms. FOX. Im glad to answer the question.
Consumers may be able to call or use the Internet to access their
account balance, but the changes in technology that are causing
problems for people is how fast money flies out of their checking
accounts.
A paper check is converted into electronic withdrawal at the cash
register and the money is out of your bank before you get out the
door of the store, or your check is converted to an electronic withdrawal that you mail in to pay some of your bills. So money flies
out of peoples bank accounts.
When they pay with a debit card, some retailers put a hold on
some of the money in their account for a few hours up to a few
days, which can cause you to overdraft because you think you have
money when, in fact, somebody else has a claim on it.
The deposits that people make are still walking into their accounts at 1990s speed, because the check hold periods, the deposit
hold periods have not been shortened to reflect increases in electronic processing. So there are a lot of things that are changing in
the banking environment that make it hard for consumers to manage.
Mr. GILLMOR. Did you want to comment, Ms. Feddis, on that
question?
Ms. FEDDIS. Yes. I think that, just to talk a little bit about the
payment systems, and transactions, were not, as Mr. Ireland said,
were not at real time.
The way most transactions are processed is using a batch processing method, and that is, after hours, the bank puts in all the
deposits that have come in for the day and then they do the withdrawals.
So the balance, theres a working balance, shall we call it, which
is the balance that the bank is working with and the consumer is
working with, and while its not perfect, it is something the consumer can use to better understand what their balance is and
whether theyre going to overdraw.
At the end of the day, only the consumer knows their balance.
Only they know what checks theyve authorized, what automatic
payments theyve scheduled, or even what debit cards that they
have authorized. The transactions may not have come into the
bank yet, and then when they finally do come in, it could cause an
overdraft, but the bank wont necessarily know it at the time of the
transaction.
Mr. GILLMOR. Just one more question, and thats on the issue of
fees.
I think theres a feeling among some that the fees tend to be
higher with the bigger banks than the smaller banks, because they
make a bigger effort to collect non-interest income.
So I want to just ask Ms. Fox and Mr. Ireland if you have anything that substantiates that statement that I just
Ms. FOX. Yes, sir. We surveyed the 33 largest banks in 2005.
They control the majority of deposit dollars.
Their average overdraft fee is higher than the average in, for example, bankrate.com, a fee survey which covered a lot more banks.
And when we went back and compared the 10 largest banks
overdraft fees for just 2 years ago and today, it has gone from $28

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21
and about 40 cents up to $33.75, so theyre higher than the small
banks and theyre growing fast.
Mr. GILLMOR. My time has expired, but maybe Mr. Ireland has
a comment.
Mr. IRELAND. Id just like to caution against looking at nominal
fees as indicative of the banks practice. Banks frequently waive
fees and assess fees on a discretionary basis.
And so whether or not that fee is charged for all transactions is
also a component in the actual charge that the bank imposes on
the consumer, and just looking at the statistics that were quoted
wont tell you that component.
I am not aware that on an overall basis, theres a marked difference between larger banks and small banks in that area.
Chairwoman MALONEY. The gentlemans time has expired.
We will not be coming back after this vote. Its an hour period
for a vote, followed by a Democratic caucus, so members will be offering questions in writing.
I would just like to offer Mr. Halperin the opportunity to respond
to Mr. Gillmors question, since your report was mentioned, and
then I would like to ask Mr. Ireland or Ms. Feddis, if there were
no cost issues and no technological issues, would you still oppose
giving consumers a warning at the ATM or point of sale that they
would overdraw their account and that there would be a fee?
But first, Mr. Halperin, I think, since your study was mentioned,
you should be given an opportunity to respond to it.
Mr. HALPERIN. Thank you, Chairwoman Maloney.
Well, in response to that question, the question that was asked
to consumers was, If you had a choice of having your overdraft
covered or not, what would you prefer?
And if Ms. Feddis had kept reading down the answers, what
would have been apparent is the vast majority of consumers would
have preferred their overdrafts covered by a line of credit or a cash
advance from a credit card if they had to have it covered from a
credit product rather than a transfer from a saving account, not
the fee-based overdraft programs that were talking about today.
And we also asked consumers, If youre at the checkout counter
and you had a choice betweenyou had to make the choice ahead
of time whether your transaction would always go through and
youd be charged a fee with your debit card or would it always be
denied and youd be charged no fee, 61 percent of consumers always wanted it denied.
And then the final piece of information on consumer preference,
which I think is important to have out today, is we asked consumers that, If you were at an ATM and you received a warning
that you were going to overdraft, would you accept that fee all the
time, never, or would it depend? And 84 percent of consumers said
they would always reject the transaction at the ATM and not take
money out if they were going to be charged a fee.
Thank you.
Chairwoman MALONEY. Ms. Feddis and Mr. Ireland.
Ms. FEDDIS. One thing about surveys is we tend to respond to
them in what we would hope to do rather than what we would actually do.

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22
I think most people, if you said, Are you going to eat the fruit
or the ice cream with the chocolate syrup, wed say, Oh, no, the
fruit, but then when it was put in front of us, we might actually
falter. And with ATM transactions and overdrafts, thats exactly
what we found.
A couple of banks have piloted programs where they make the
disclosure at their own ATM, because they cant do it elsewhere,
and one bank reported that three-quarters of people proceeded with
the transaction.
Now, thats different from a point-of-sale transaction, where I
think we would find a larger percentage approving the transaction,
because at that point, youve already consumed the meal, the groceries are bagged, the kids are crying, the ice cream is melting, the
barber has already cut your hair. You want them to proceed with
the transaction.
Plus, unlike an ATM transaction, its not an anonymous transaction. Youre actually looking at somebody in the face and saying,
Oops, I dont have enough money. And its embarrassing.
And so in many cases, while we would hope never to overdraw
our account, we do.
But on your other question
Chairwoman MALONEY. So if you would clarify, from what youre
saying, I dont want to put words into your mouth, but it appears
that you would not object to notice to consumers to allow them to
make a decision whether they want to pay a fee or not or
Ms. FEDDIS. We would not, absent the prohibitive costs, we
would not, but of coursewe would not object to the disclosure, no,
we would agree that disclosure would be better.
Chairwoman MALONEY. So then, do you support the bill?
Ms. FEDDIS. Again, it goes down to the cost prohibitiveness of the
technological challenges. I dont know how much time you have. I
dont want to
Chairwoman MALONEY. So if there were no cost issues, and there
were no technological challenges, then you would support the bill?
Ms. FEDDIS. As long as there were some exceptions. There are
still exceptions, for example, there are some places where it probably isnt feasible.
Lets use the example of some emerging developments where consumers could use their
Chairwoman MALONEY. Just a yes or no. If there were no cost
issues
Ms. FEDDIS. With some exceptions
Chairwoman MALONEY. and no technological problems, you
would support the bill, the notice to consumers?
Ms. FEDDIS. The notice to consumers, we would support, so long
as there were some exceptions, for like the process just announced
in New York with the New York and New Jersey PATH railway,
where its a tap and go card. You probably couldnt have a screen.
You wouldnt want the delays, because that would halt traffic. So
youd have to have some flexibility.
Chairwoman MALONEY. Mr. Ireland, would you like to comment?
Mr. IRELAND. Im in favor of informed choice for consumers, and
if I could get there without costs and operational problems, Id love
to get there.

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23
There arethe world we live in has costs and operational problems.
Some of them areyou know, the subway system potential as to
how youre going to exercise the choice in the line, and the balance
issues are going to be ongoing, and even if you know the balance,
quite frankly, Id go beyond the bill, even if you know the balance
now and youre going to do an ATM transaction, you ought to know
how thats going to affect other transactions in process, so you can
choose which one you want to do.
If we could get there, Id love it.
Chairwoman MALONEY. I thank everyone for their testimony. Im
afraid Im going to miss a vote if I dont leave. Ive really enjoyed
learning from you today, and I look forward to continuing this dialogue.
And I would like to note for the record that members may have
additional questions for this panel which they may wish to submit
in writing, and without objection, the hearing record will remain
open for 30 days for members to submit written questions to these
witnesses and to place their responses in the record.
Again, I thank you for your expertise and your time, for being
here today, and for your testimony.
Thank you. The hearing is adjourned.
[Whereupon, at 3:09 p.m., the hearing was adjourned.]

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APPENDIX

July 11, 2007

(25)

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